**Michael Murg**

**1**

Section 1

Banking

Universities of Applied Sciences Joanneum, Austria

Section 1 Banking

**3**

**Chapter 1**

**Abstract**

Capital Adequacy Regulation

This chapter aims to provide a concise overview of the capital adequacy regulation, importance of the regulation, and evolution of the capital adequacy regulation. Bank capital executes the significant role of preventing the bank from failure and acts as a buffer against possible losses. Capital adequacy is the least amount of capital a bank has to preserve to execute the business, take advantage of profitable growth opportunities, absorb losses, and sustain the customers' confidence on it. Several bank crises and bank defaults motivate the Basel Committee on Banking Supervision to provide a comprehensive guideline in managing bank capital. The capital adequacy regulation is an international standard to safeguard the banks through setting a risk-sensitive minimum capital requirement. The regulatory authority sets the regulatory capital, and the operating banks are

**Keywords:** capital adequacy regulation, Basel Accord, Basel Committee,

History of several bank failures evidences how the excessive risk taking can affect the whole economy as well as the global financial scenario. Since bank deals with different kinds of risks, the regulators strive to minimize this risk exposure through different regulations. The key regulations aiming to minimize the risk and bank failure is the capital adequacy regulation. The principle of the capital adequacy regulation is based on the fact that the minimum capital should be high enough to absorb the potential losses. While capital acts as a buffer for the bank, in the distressed period, the higher the buffer, the lower the risk of default. Therefore, the importance of maintenance of adequate level of capital is never overestimated. This chapter will present a brief history of capital adequacy regulation and the

Bank for International Settlement (BIS), the oldest international financial organization, was founded in 1930. Its members are central banks or the regulatory authorities of 60 countries. The committee aims to serve as a regulatory authority

West Germany's Herstatt Bank closed its operation on June 26, 1974, due to excessive foreign exchange risk that posed counterparty risk in international settlement with the banks in New York. Subsequently, at the end of 1974 due to this

for monetary and financial stability and foster international cooperation.

*Aysa Siddika and Razali Haron*

required to maintain the adequate level of capital.

regulatory capital, risk-weighted asset

evolution of the regulation over time.

**2. Basel Committee on Banking Supervision**

**1. Introduction**
